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Taxing the Digital Economy Recent Development

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Taxing the Digital Economy – Recent Development Yong Sing Yuan 1 Date of Presentation: 11-11-2019
Title of PresentationYong Sing Yuan
BEPS Project
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by MNEs that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity
2013: OECD and G20 adopted a 15-point Action Plan to address BEPS To ensure that profits are taxed where economic activities take place and value
is created
2015: A package of measures to address BEPS was delivered
• An Inclusive Framework of 130+ countries and jurisdictions are collaborating on the implementation of the BEPS package.
The tax challenges of the digitalisation of the economy was identified as one of the main areas of focus of the OECD/G20 BEPS Project
The BEPS Action 1 – 2015 Final Report (the “Report”) found that the whole economy was digitalising and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy
Tax Challenges of the Digitalisation of the Economy
4 40th CATA
Tax Challenges of the Digitalisation of the Economy
Emergence of new and highly digitalised business models
Companies deliver goods and services in novel manners
Goods and services transacted online and supplied from offshore Value created in a jurisdiction But consumption takes place in another
How should tax principles and rules be applied?
The genesis of events
and certain business models presented
challenges for international
report by April 2018 and a final report in 2020
Interim Report set forth review of profit allocation
and nexus rules to work towards
consensus-based solution
of Work to develop a
consensus-based long-term solution
End 2020 Long-term
consultation meetings for each Pillar to be held at
the OECD
End 2019
international tax changes to be agreed by the
Inclusive Framework
Jan 2020
Tax Challenges of the Digitalisation of the Economy
OECD TFDE interim Report on tax challenges of highly digitised business models Scale without mass Heavy reliance on intangibles Data and user participation
Two fundamental concepts in international income tax system examined Profit allocation Nexus rules
7 40th CATA
Tax Challenges of the Digitalisation of the Economy
The Programme of Work provides for two pillars to be explored. Discussions are still ongoing
Pillars One and Two
• New profit allocation rules
• Aims to address the remaining BEPS issues
• Provide jurisdictions with a right to “tax back”, where other jurisdictions do not tax or subject an income to low tax
Allocates more profits (taxing rights) to market jurisdictions
Sets a floor to tax competition by limiting tax rates
Pillar One
• Largely based on sales
New Profit Allocation Rule going beyond the Arm’s Length principle
• Largely retain current transfer pricing rules
• Complements with formula based solutions
Increased Tax Certainty via Three Tier Mechanism
• Amounts A, B and C
Pillar One
To allocate more taxing rights to the market jurisdictions through a Three-tier mechanism
Annex B
A share of deemed residual profit allocated to market jurisdictions using a formulaic approach (new taxing right)
A fixed remuneration for routine marketing and distribution functions in the market jurisdictions
Remuneration for additional functions in the market jurisdictions
Parent jurisdiction can tax the income of the entity’s foreign branches and subsidiaries
• “Top up” tax in the parent jurisdiction
Jurisdiction of payer can deny deduction for payments made to related parties
• “Top up” tax in the payer’s jurisdiction
Jurisdiction of payer can deny treaty benefits (e.g. reduced withholding tax rate)
• “Top up” tax in the payer’s jurisdiction
Income not subject to a
minimum tax rate
Income inclusion rule
Not yet determined
Annex C
Singapore’s perspective
• Singapore participates in OECD’s Inclusive Framework on BEPS, Task Force on the Digital Economy and the relevant Working Parties.
• Singapore is a member of the OECD’s Inclusive Framework Steering Group.
Singapore supports the work led by the OECD in developing a consensus-based solution
Singapore is committed to work with members of the BEPS Inclusive framework towards a consensus-based solution on a without prejudice basis
It is important that the solution is anchored on sound economic principles
Singapore’s perspective
Support global economic growth and innovation
Maintain the level playing field for all economies, large or small, developed or developing
Recognise the unique social and economic circumstances of jurisdictions
Singapore’s perspective
Avoid unilateral actions, which may inadvertently lead to over- taxation
Avoid hindering trade, creating uncertainties, adding costs to business
Ultimately, consumers will bear the additional cost
Singapore’s perspective